THE LAY OF THE LAND

The Arc Legal team regularly provides media comment on relevant issues. Below is an article published in the insurance trade publication, Insurance Age, on why brokers should be fully prepared for the upcoming Tenancy Deposit Protection legislation.

The private rented housing market is preparing for change with the upcoming introduction of legislation that provides greater security for tenants’ deposits. Richard Finan urges brokers to get ahead of the game so that they can tap into this potential windfall.

The private rented housing market has seen phenomenal growth over the past decade. In 1988, the sector constituted only 9% of households in the country. Today, that figure is close to 12%, with almost 2.5 million homes in England now rented from a private landlord.

Insurers and brokers have been quick to respond to the needs of landlords with products and services, which range from traditional property insurance to rental guarantee cover. As the sector continues to grow, brokers have the opportunity to play an increasingly important role in supporting landlords.

The role of brokers in this sector has, in the main, focused on placing services – whether it is for letting agent schemes or more established landlords whose portfolios require property and liability protection. However, with the imminent arrival of legislation to provide greater security for tenants’ deposits, brokers have an opportunity to enhance their relationship with landlord clients.

A first-time landlord will inevitably turn to their local letting agent for advice and guidance on the regulations and legislations in place to protect tenants. However, as an amateur landlord increases their portfolio and knowledge of ‘the basics’, brokers are well placed to offer not only best advice on the most appropriate cover but also wider support and guidance.

The potential for further growth in the sector certainly exists, with the appetite for returns from a buy-to-let bonanza showing no signs of waning. For private landlords, the potential for a real return on investment is a great draw. However, the rental boom has increased government scrutiny specifically around tenants’ rights and protection. The government has also indicated its desire to strengthen the private rented sector through improved standards in terms of the quality of properties and landlords’ management of both properties and tenancies. As a result, legislation such as The Housing Act 2004 has been implemented.

This Act requires the government to introduce mandatory tenancy deposit protection (TDP), which will require any landlord taking and holding a deposit on an assured shorthold tenancy in England and Wales to become a member of one of the specifically established deposit protection schemes.

From 6 April this year, when TDP comes into force, landlords will have three options open to them. Firstly, they could stop taking a deposit from their tenants – but few are likely to take this route. Secondly, they can lodge the whole deposit with a custodial scheme at the start of the tenancy. Thirdly, if they want to hold the deposit themselves, they will need to join an insurance-based deposit scheme that is approved by the Department of Communities and Local Government (DCLG). Landlords will have to pay a fee in order to obtain the ‘protection’ required by the Act for each deposit held by them.

Under insurance-based schemes, a tenant’s deposit is retained by the landlord who then pays a fee to their chosen scheme, which will then, in turn, pay a premium to an insurer. In the event of a landlord failing to return part or all of the deposit at the end of the tenancy, the insurance arrangements will ensure the return of the deposit to the tenant if they are entitled to it.

Both the custodial and insurance-based schemes will make provision for disputes between landlords and tenants, over the return of any deposit, using a fast-track alternative dispute resolution (ADR) service. Effectively, in the event of a dispute over the return of all, or part, of the deposit, an impartial body will make a decision as to the proportion of the deposit that should be retained by each party. While court action is still available to both the landlord and tenant, the quicker and cheaper route of ADR will also now be available if both parties agree and recognise that the decision will be binding.

Research conducted by Hamilton Fraser Insurance – which has been appointed by the DCLG to operate one of the insurance-backed schemes through a joint venture company, Tenancy Deposit Solutions, with the National Landlords Association – shows that a large number of landlords will want to continue to hold onto the deposits that they take from tenants. This fact, together with data showing that the average deposit in England is £695, means that it is no surprise that the insurance-based scheme option is expected to be more attractive to landlords.

In response to TDP, legal expenses insurers are very likely to introduce specific exclusions within their landlord-related policies, removing cover where landlords fail to comply with the new legislation.

Landlords also face further exposure to litigation resulting from legislation, such as The Gas Safety (Installation and Use) Regulations 1994, The Furniture and Furnishings (Fire) (Safety) Amendments Regulations 1993 and The Electrical Equipment (Safety) Regulations 1994. Each places an obligation on landlords to ensure the safety of tenants and failure to comply is a criminal offence.

While cover exists to pay legal costs to defend criminal prosecutions in certain areas, it is clearly better to ensure a landlord is aware of their responsibilities and the implications of failing to address than to simply hope they are covered. Brokers’ understanding of the covers available, together with an enhanced knowledge of areas such as exclusions, is a powerful tool in building client-broker relationships.

Legal expenses insurance has now been developed to cover costs associated with tenant evictions, as well as criminal prosecutions arising from the ownership of the property and to protect against rent arrears. There is no doubt that this kind of response from the sector has helped brokers to build productive relationships with landlords. However, how much better could this be if brokers demonstrated awareness and understanding of the key issues faced by landlords? Without a doubt, they could benefit from filling a clear gap in the provision of support and advice to this potential, growing market.”

The full article can also be found on the Insurance Age website at www.insuranceage.com